Business World

Thursday 14 December 2017

EU orders Spain to re-write national budget, demanding more cuts

Spain’s prime minister Mariano Rajoy
Spain’s prime minister Mariano Rajoy

Mehreen Khan

Spain has been told to re-write its national budget after the government's plans fell foul of the European Union's tough spending targets, two months before the country heads for national elections.

Madrid will now have to implement more spending cuts and raise taxes after the European Commission said its draft budget forecasts failed to comply with Europe's fiscal rules.

Brussels estimates that Spain's deficit will come in at -4.5pc this year and -3.5pc of GDP in 2016 - contravening the -3pc limits laid out by the EU's "Stability and Growth Pact" rules.

The calculations clash with the government's own draft projections which estimate the deficit would fall to -4.2pc this year, and -2.8pc in 2016.

The decision is a setback for the ruling government of prime minister Mariano Rajoy, which has overseen harsh austerity after country's banks were bailed-out by international lenders in 2012.

Spain has managed to emerge from a three year recession to become one of the fastest growing economies in the eurozone this year. It has also undergone significant belt-tightening, with the government deficit having shrunken from -11pc in 2009.

Mr Rajoy's Partido Popular party, which has complied with Brussels' demand for austerity, has fallen behind the opposition Socialist party in polls ahead of the election on December 20. The vote has been billed as a plebiscite on the ruling government's economic policies.

Brussels intervention could also embolden anti-austerity sentiment in the country - including the hard-Left Podemos movement which has vowed to resist economic diktats from the EU. The decision could also complicate Madrid's relationship with the Catalan government, which is demanding more fiscal autonomy after its separatist leaders won regional elections last month.

Pierre Moscovici, the EU's economics chief, denied the Commission's judgement was motivated by the looming general election.

"We use rules, there is no ideology in our work", said Mr Moscovici. "What counts is to talk about figures. We work on the basis of facts".

Valdis Dombrovskis, the Commission's vice-president said: "The substance of the analysis is not affected by elections".

Madrid will now need to provide more details on how it plans to curb local government spending and "stay the course of reforms" said Mr Dombrovskis.

Despite being hailed as one of the eurozone's model pupils, Spain's economic recovery has attracted high-profile detractors.

Olivier Blanchard, the recently departed chief economist at the International Monetary Fund, said the country's "growth miracle" was largely illusory.

"When people talk about the Spanish miracle, I react", said Mr Blanchard.

"When you have 23pc unemployment and 3pc growth, I don't call this a miracle yet."

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